Category Archives: Retail

a US holiday shopping post-mortem

January 17, 2014 By in Industry Analysis, internet, Portfolio management, Recent Market Action, Retail, Stock ideas Tags: , , , , , , , Leave a comment

Information is trickling in about how the holiday shopping season in the US went.  What jumps out at me (not necessarily exactly what was said) so far is:

–overall retail sales were up by 3.8% year-on-year.  To my mind that’s great, not the disappointment (vs. expectations of +3.9%) it’s being pitched as.  The reason:  the comparison is between the shortest possible holiday season, in 2013, and the longest possible in 2012.

–extended store hours didn’t appear to do much for sales.  It increased costs, though.

–the weak got weaker (think:  Best Buy, Sears, JC Penney).  Sears and Penney are both closing stores.

–Macy’s is laying off 2,500 in-store workers and hiring an equal number to work on its on-line offering

–mall traffic (not sales necessarily, but the number of visits by potential customers) is down by 50% from three years ago

–on-line sales were up by 9.3% yoy

my take

I’ve begun to believe that generational change–a passing of the baton from the Baby Boom to Millennials–will be an important stock market theme in the US for years to come.  I think the just-passed holiday season is evidence in favor of this idea.  (By the way, I heard the other day–but haven’t checked the source–that the single most important attribute to current car buyers is the technology in the car, not styling or engine power.  If I heard correctly, another piece of evidence.)

I’ve always thought that the greatest risk to equity portfolio managers performance  is that as they become more successful and wealthier, they gradually lose touch with the way normal people live their lives.  As that happens, they become less able to see the economic currents that ultimately influence stock prices.  Celebrity hedge fund managers are particularly vulnerable, in my view–but that may just be my prejudice.

Why is this important?    …because you and I will see this change going on long before the professionals do.  So we’ll be able to find the names and position our portfolios to benefit in advance of the wave of buying that will come as the light bulb comes on for gated-community pros.

 

 

 

four reasons retailers are antsy about the upcoming holiday season

November 13, 2013 By in Industry Analysis, Retail Tags: , , , , , Leave a comment

The first two are obvious:

1.  Retailers make a disproportionately large shares of their profits during the final quarter of the year.  For some highly seasonal businesses (toys, coats, ski equipment…), they aspire to simply break even during the first nine months of the year and cash in during the last three.

2.  The continuing erosion of bricks-and-mortar market share to online merchants.  Highly seasonal firms are particularly susceptible to online competition, but they have also been battered for decades by general merchants like WMT or TGT, which expand and contract various departments as the seasons change.

The third is very simple, but often overlooked by Wall Streeters:

3.  The holiday selling season runs from Thanksgiving to Christmas.  But the number of selling days can vary considerably from year to year.

Thanksgiving is the fourth Thursday in November.  If November begins on a Thursday, as it did last year, Thanksgiving is on the 22nd.  So the holiday selling season consists of 8 days in November and 24 in December = 32 days.  That’s the longest.

If November begins on Friday, as it does this year, Thanksgiving is on the 28th.  That means the selling season is 26 days long.  That’s the shortest.

Historically, people shop until December 24th–and spend more when the selling season is longer.  So revenue and earnings comparisons are the toughest possible this year.

4.  In the post-Great Recession world, retailers hold another belief as firmly as they hold #3.  It’s that consumers have firmer budgets than they previously have had.  Therefore, if a retailer isn’t the first place a consumer goes to, it runs the risk that the potential customer will have run through his budget already–and (contrary to pre-Great Recession behavior) won’t purchase, no matter how attractive the merchandise is.

So this year there’s immense pressure both to get off to a good start and to move the starting line forward, to Thanksgiving Day or even earlier, if at all possible.

my take

My guess is that the holiday season will be more successful for retailers in general than Wall Street currently expects–despite the shortest possible selling season.  Why?   …strengthening employment and lower gasoline prices.

The more interesting question, to my mind, is who the relative winners and losers will be.  In particular, will AMZN’s agreement to collect state sales tax on its online transactions affect its business negatively?  My guess is that it will.  I think the beneficiaries won’t be the bricks-and-mortar stores that lobbied heavily for this, but instead smaller online merchants who still sell tax-free–including (maybe especially) the ones AMZN displays on its site but only fulfills for.

Also, will BBY’s decision to match online prices in its stores and to rent out space to third parties like Samsung and MSFT have a positive impact on sales?  I say yes.  What about profits?  I think they have to be lower.  But my instinct is also to say they’ll be better than the consensus expects.  I’m not about to bet the farm that this will be so, however.

 

two lessons for analysts from JCP

September 26, 2013 By in Current Market Thoughts, hedge funds, Retail, Stock ideas Tags: , , , , , Leave a comment

JCP  in the press again over the past two days.

I’ve only seen the headlines, which assert that:

–JCP is trying to sever the 10-year $200 million agreement the previous CEO, Ron Johnson arranged with Martha Stewart.  Why?   …the MS merchandise isn’t selling

–JCP is looking to raise new funds

–a Goldman analyst has used the “B” word (bankruptcy) in warning clients to avoid JCP stock.

I want to make two relatively narrow points:

1.  Analysts are extremely reluctant to speculate on a possible corporate bankruptcy in writing.  They may mention the possibility on the phone or in meetings, but not in print.

A boss of mine years ago at Value Line did this once.  He wrote about a small-cap magazine company that if weak advertising trends continued for the following twelve months, there was a risk the firm would have to close its doors.  Advertising dried up almost immediately on publication of the report.  The company was out of business in three months.

Raising the prospect of bankruptcy is like shouting “Fire!!” in a crowded theater.  It has consequences.

Also, if the firm survives it will never forgive the analyst who made the call.  The Goldman analyst who wrote the report must either be very young or extremely confident that the prediction won’t come back to haunt him/her.

 

2.  In graduate school I spent a year at the university in Tübingen in southwest Germany.  For a while I lived with a family where we all went mushroom hunting on weekends.  What we found made up at least one or two meals the following week.  That’s where I learned about the deaths head mushroom.  Eating it is most often fatal; symptoms only emerge after it’s too late to get treatment.

The obvious course of action–learn what the deaths head looks like, and don’t eat it.

There’s an analogy here.

In the case of JCP, the symptoms we’re seeing now are the direct result of corporate decisions made two or more years ago by ex-CEO Ron Johnson and defended for a long time by Bill Ackman.  Oddly, both seem to have been thinking–contrary to all experience–that falling sales could be remedied by applying a double does of what was causing them.  What’s equally surprising is the the JCP board let the situation go unaddressed until it had reached crisis proportions.

 

My second point:  many times corporate strategies, once put in motion, are difficult or impossible to reverse.  So we, as investors, have to be constantly scanning the horizon for indications of possible weakness. Normally, the early signs of deterioration are found on the balance sheet (rising receivables and inventories) and the cash flow statement.

For JCP, though, there was nothing subtle about its difficulties.  Sales fell apart almost as soon as Ron Johnson took the controls.  Another reason it”s so hard to understand why the board let the situation get so out of control.

 

the SEC investigates store chains’ internet sales claims

August 30, 2013 By in Amazon, Industry Analysis, internet, Retail Tags: , , , , , Leave a comment

the SEC questions internet sales hype

According to the Wall Street Journal, the SEC recently sent inquiry letters to a bunch of retailers asking them to quantify claims managements were making in quarterly earnings conference calls about internet sales and internet sales growth.  Fifth & Pacific (Kate Spade, Juicy Couture…), for example, told investors it had a “ravenously growing” web business.  Others tossed around numbers like up 30%.

On the other hand, while online sales in the US may be growing faster than revenues from bricks-and-mortar operations, they’re still only in posting increases in (low) double digits, and make up less than 6% of total retail.  So the SEC was concerned that the company talk might be more hype than reality.  Why no disclosure of internet sales as a percentage of total sales?

The SEC got two types of reply:

—equivocation.  Some retailers said they don’t disclose the size of online sales because they’re “omnichannel” firms.  An individual customer may sometimes visit a store, sometimes order from a desktop at work, sometimes buy from a smartphone on the train going home in the evening.  It’s the total customer relationship that counts, they said, not the way someone may buy any particular item.  Translation:  online sales are almost non-existent, but we know shareholders will react badly if we say so.

—confession, sort of.  Others said that online sales were “immaterial,” meaning no more than a couple of percentage points of total sales.

there’s information here

Why not just say so?

…because it sounds bad.

Why bring up internet sales in the first place?

…because we have no other good things to say.

look at the income statement

I could have told you that, just from taking a quick look at company income statements.

Here’s my reasoning:

–if a company’s internet sales are growing at, say, 20% and comprise 10% of total sales, then they’ll contribute 2% to overall sales growth.  Because online sales are free of many of the costs of bricks-and-mortar stores, like salespeoples’ salaries and rent, they should carry (much) higher margins than sales in physical stores.  Therefore, if internet sales are big, we should see accelerating sales growth and rising margins.

Take Target (TGT) as an example.  Aggregate sales are growing at about a 3% annual rate with no signs of acceleration.  Operating margins are flat to down.  If online sales contributed 2/3 of total growth, TGT would have to disclose that  …and margins would be heading up noticeably. Therefore, internet sales can’t be anything close to 10%–or even 5%–of TGT’s business.

By the way,  TGT’s response to the SEC was that its internet sales are immaterial.

why the SEC investigation?

Every company is going to try to spin the facts of its performance in a favorable way.  Just take a look at the 10-K, where management can go to jail if disclosure is incomplete or counterfactual.  It’s chock full of dire warnings of what might go wrong.  It’s also in dense print with no pictures.  Compare that with the annual report, where every page is glossy, every face is smiling and the skies are always blue.

Also, retailers are marketers, after all, so we should expect an unusually rosy portrayal of results and prospects from them.

Still, there are limits.  Even if the border line is a bit fuzzy, there comes a point where  positive spin becomes deception, where touting the fantastic prospects of a currently minuscule business becomes fraud–especially if it’s in an area like online where Wall Street is intensely interested.

I interpret the SEC letters a warnings to the companies involved that they have been treading dangerously close to that line, and may even have stepped over it.  Expect a much more 10-K-ish assessment from now on.

 

housing boom and retail sales

August 19, 2013 By in Current Market Thoughts, economics, Industry Analysis, Recent Market Action, Retail Tags: , , , , , , , , Leave a comment

Last week, Macy’s, Kohl’s and Wal-Mart all reported disappointing 2Q13 results–leading to worries that economic growth in the US is beginning to slow.  In Wal-Mart’s case, I think the problem is structural, not cyclical.  The manufacturing  jobs much of the chain’s lower-income customer base has traditionally had have disappeared forever.  With them, fat paychecks have gone as well.

But what about Macy’s and Kohl’s?  Why are their results so at odds with general economic indicators?

One possibility is that the weakness in general merchandise they’re exhibiting is a result of the housing boom.

In most areas of the world, and over most periods of time–except for the US during the past few decades–a cyclical housing boom alters consumers’ retail spending patterns.  The change usually appears with a modest time lag.

After buying a new residence, the owners typically redirect their spending in two ways:

–more of their income goes into paying their mortgage, and

–they redirect what remains toward furnishing and decorating their new home.

So spending on furniture, kitchen appliances, paint, carpeting… rises.  Spending on restaurants, cellphones, clothing… falls.  The latter category doesn’t drop to zero.  But consumers cut back–both on big-ticket items and on shopping-as-entertainment, where the items in question aren’t unique or special.

The only exception to this pattern that I’m aware of comes close to home.  During the long period when interest rates in the US were in decline–from the early Eighties until now–falling interest rates made housing prices rise so quickly that new homeowners weren’t forced to cut back on spending.  They could borrow against their fast-appreciating home equity, instead.

It’s too early to tell for sure, but the lackluster sales we’re seeing from Macy’s and Kohl’s may just be a return to normal by US homeowners after an extended period of excess.  If so, the situation is a threat to department store profits, and stock prices, but not to the overall economy or stock market.